SIA Engineering Company Ltd (SGX: S59) and Singapore Technologies Engineering Ltd (SGX: S63) are two engineering firms that operate in a similar industry. In this article, let’s find out which of the two companies might offer a better value right now.
A brief background on the firms
SIA Engineering, or SIAEC for short, provides aircraft engineering services such as airframe maintenance and overhaul, line maintenance, technical ground handling and fleet management. As of 1 June 2018, our flag carrier, Singapore Airlines Ltd (SGX: C6L), had a 77.8% stake in SIAEC. The engineering firm also has a portfolio of 25 joint ventures in eight countries.
ST Engineering, on the other hand, is a global technology, defence and engineering conglomerate specialising in the aerospace, electronics, land systems and marine industries. In 2017, the aerospace business segment took up the bulk of ST Engineering’s total revenue at 38.5%.
The table below shows the market capitalisation and revenue for the two firms. Market capitalisation is as of the closing prices on 13 July 2018. Do note that all figures quoted in the tables that follow are for the full year ended 31 March 2018 for SIAEC and for the full year ended 31 December 2017 for ST Engineering, unless otherwise stated.Source: Individual company’s earnings report; author’s calculation
Round 1: Profitability
In the first round, we will analyse the profitability of the companies in terms of profit margins and return on equity (ROE). The ROE figure reveals how efficient the management is in turning every dollar of shareholders’ capital into profits.Source: Individual company’s earnings report
For every dollar of revenue created by SIAEC, around 17 cents were generated as profit, but for ST Engineering, every dollar of revenue gave only around 8 cents in earnings. However, ST Engineering has a much higher ROE than SIAEC.
Winner: SIAEC, with its higher gross and net margins.
Round 2: Growth
In the next round, we will compare the revenue, gross and net profit compounded annual growth rate (CAGR) of the two firms for the past five financial years. Firms that can grow both their top-line and bottom-line consistently over time should also see their share price go up.Source: Individual company’s earnings report; author’s calculation
Both companies have seen their revenue, gross profit and net profit dwindle over the past five years. However, ST Engineering’s revenue and net profit have been decreasing at a slower rate than that of SIAEC.
Winner: ST Engineering, with its relatively better revenue and net profit trend.
Round 3: Valuation
As Foolish investors, it is essential to focus on the value of the business and not on the daily changes in the stock price.
We will now compare the price-to-earnings (PE) ratio, price-to-sales (PS) ratio and dividend yield of the two companies. The values below are as of the closing prices on 13 July 2018.Source: SGX StockFacts; author’s calculations
ST Engineering seems to offer better value than SIAEC with its lower PS ratio and higher dividend yield.
Winner: ST Engineering.
The Foolish Bottom Line
Final Score: 2-1 to ST Engineering, as it has triumphed over SIAEC in two out of the three rounds.
In this simple comparison exercise, we did not evaluate the balance sheet strength, free cash flow situation and growth prospects of the two firms. Potential investors interested in ST Engineering should research more on it before investing their money. The quick comparison above should help to take some heavy-lifting off their back though.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.